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When Do VCs Invest?

A partner at a well known venture capital firm told me once that VCs like to invest “when it’s time to add fuel to the fire” (in a positive manner). In other words, VCs like to invest when their money will be used for growing the business, rather than for building the initial product and proving the business concept.

The reason for this phenomenon is that VCs manage large amount of capital, and thus don’t have the bandwidth for managing many small early-stage investments. Instead, their business model is to invest at least a few million dollars in each company over a course of several years. Therefore, the VCs’ sweat spot is usually an investment round of at least 1-2 million dollars (i.e. an ‘A Round’ or later).

In today’s technological environment, bringing a web or mobile product to the market doesn’t require more than $100,000 to $200,000. Some would say even less. Hence, the point where venture capital money comes to play is when bigger amounts of money are required to scale the business to the next level (“add fuel to the fire”)

However, before VCs are willing to invest this money, they want to see some evidence that there’s a good product-market fit. Most important, they want to see a high level of user engagement and traction (i.e. a large user base which is constantly growing). Usually, they would also like to have some preliminary evidence about the customers’ acquisition cost and life-time value. This helps them validate that the business can scale economically.

From your perspective, this means that there is no point in pitching VCs before you can present such evidence. Instead, try to raise early stage money from Angel investors, who usually prefer to invest smaller amounts of money at a stage where the risk is higher and the valuation is lower.